Home Discover Journals PMC Scam Aftermath: Will The Government Introduce New Regulations for Co-operative Banks?

PMC Scam Aftermath: Will The Government Introduce New Regulations for Co-operative Banks?

By Finserv MARKETS - Dec 19,2019
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PMC Scam aftermath: Will the government introduce new regulations for cooperative banks

The most recent scam involving the banking sector revolves around Punjab and Maharashtra Co-operative Bank, which (PMC)is an urban cooperative bank (UCB) having a strong presence in multiple states. Having been embroiled in a banking fraud to the tune of over 4,000 crores, the cooperative bank has left account holders and depositors in a crisis of faith. The scam has also affected the financial system, with more people turning skeptical about the strength of regulations that govern cooperative banks in the country.

Here’s are some of the immediate effects of the PMC scam.

Stringent withdrawal limits:

The RBI initially introduced a withdrawal limit of Rs. 1,000. Subsequently, over the course of the past weeks, the limit was increased to Rs. 10,000, the Rs. 25,000, and now, to Rs. 40,000. Despite this progressive increase, the restrictions have been hard on the bank’s customers.

Bleak forecast for depositors:

Depositors who’d booked fixed deposits with the PMC bank may only receive Rs. 1 lakh if the bank fails to recover the dues. This deposit insurance is extremely inadequate to cover larger fixed deposits worth Rs. 5 lakh or more.

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Crippling of demand:

The PMC bank scam has also resulted in a crisis of confidence among the people, making them afraid to trust banks with their money. This setback could undo the effects of demonetization, which aimed to drive cash savings into the formal financial sector. It has also slowed down public consumption and crippled demand.

Tracing the problem back to its source reveals several loopholes in the way the bank was governed. Cooperative banks, in general, aren’t regulated as strictly as other banks.

So, what are the problems with existing regulations for cooperative banks?

Before the PMC scam came to light, the bank had a capital adequacy ratio of 12.62% (which is well over the 9% level prescribed by the RBI) and a relatively low share of NPAs. And yet, below the surface, there was a lot that was going wrong. This discrepancy between the actual state of affairs and the reported state of affairs points to several problems in the way the cooperative bank was governed.

PMC Scam aftermath: Will the government introduce new regulations for cooperative banks

Source: thehindu.com

Loopholes in supervision of cooperative banks:

Cooperative banks are governed by the RBI as well as the respective State governments. This dual regulation often leads to a marked gap in the governance of cooperative banks. Supervising the regular operations of these banks becomes a task that’s passed back and forth between the regulating bodies, thus giving the bank a lot of unsupervised leeway in-between. It becomes easier to initiate a fraud in this space.

Failure of internal control systems:

Internal controls in place within the bank need to be stronger if such scams are to be prevented in the future. Currently, with weak internal controls, it’s only a matter of time before they fail to achieve the purpose for which they were established. Audits need to be streamlined as well, so under reporting or falsified reporting is not only penalized, but also made impossible.

It also doesn’t help that despite regular annual inspections by the RBI, this scam wasn’t uncovered by the regulating body. It came to light only when a source from within the bank brought it to the notice of the central bank. So, what remains to be seen is how the RBI and the central government will react to this issue to ensure that such bank frauds don’t reoccur.

Will the government introduce new regulations for cooperative banks?

Reacting to the PMC scam, finance minister Nirmala Sitharaman has expressed a two-fold strategy to improve the situation for depositors in particular and for the economy in general.

Increase in deposit insurance: The insurance coverage offered to fixed deposit holders is a mere 1 lakh rupees. This amount has remained unchanged since it was introduced in 1993. The finance minister acknowledged that a hike in this cover is the need of the hour.

Tightening the regulations on cooperative banks: The finance minister also mentioned that the government is looking into the steps that need to be taken to better regulate these banks and minimize space for errors, scams,and frauds. The central bank and the government need to work together to come up with a system that’s stronger and easier to monitor.

The lending norms, in particular, need to be tightened. PMC bank was guilty of disbursing high-value loans to non-priority sectors. To prevent such mistakes, the governing bodies need to ensure that loans are disbursed to priority sectors that were originally meant to benefit from the establishment of UCBs.

PMC Scam aftermath: Will the government introduce new regulations for cooperative banks

Source: thehindu.com

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